If your company sells, how much money will you make?
It can be more complicated than you think - especially if your equity is still vesting.
This week we’ll cover the concept of triggers - mechanisms to accelerate your stake in the company upon a “change of control”.
More specifically, we’ll give you the ins and outs of single and double trigger clauses.
You’ll want to negotiate one of these in your next role, so we give you the stats on who typically is eligible, and sample language to adapt below:
Background
In the context of exec comp, particularly with regard to stock options and other equity awards, "single trigger" and "double trigger" provisions are mechanisms designed to protect executives in the event of a change in control, such as a merger or acquisition. These provisions dictate when and how unvested equity awards become vested and can have significant implications for both the executives and the company.
How Single Trigger Works
Single trigger acceleration means that an executive's unvested equity awards automatically vest upon the occurrence of a single event, typically a change in control of the company.
The company gets acquired, and BOOM. If the acquirer wants the exec to stick around, the cash and equity associated with doing so will have to come out of their pocket and cap table.
More specifically:
Immediate Vesting: Upon a change in control, all unvested stock options, restricted stock units (RSUs), or other equity awards immediately become fully vested. The exec gets a big whack of cash.
Simplified Transition: This can make the transition smoother for executives, as they don’t need to worry about the continuity of their equity vesting if the company is sold or merged. Everything offered from here on out for employment will be “net new”.
Potential Drawbacks: While attractive for executives, single trigger provisions can be seen as less favorable by acquiring companies because it might lead to key executives leaving soon after the change in control, potentially destabilizing the organization during a critical period. In other words, if the brain power leaves, it can cause damage to the value of the asset they just bought
How Common Are Single Triggers?
According to recent studies, less than 5% of companies now offer single-trigger cash severance benefits (Sources: Pulley, Meridian Compensation Partners).
How Double Trigger Works
Double trigger acceleration is more complex and typically involves two (hence, double) conditions that must be met for the unvested equity awards to vest.
These conditions generally include the following:
Change in Control: The first trigger is the occurrence of a change in control event, such as a merger, acquisition, or significant asset sale.
Termination Without Cause or Resignation for Good Reason: The second trigger requires that the executive be terminated without cause or resign for good reason within a specified period following the change in control.
Good Reason May Include: You get substantially demoted, your compensation meaningful changes in a way that’s not a blanket reduction in everyone’s comp, you have to relocate, etc.
Example time!
Scenario: A tech company undergoes a merger, and the CTO has a double trigger provision. The merger occurs (first trigger), and six months later, the CTO is terminated without cause (second trigger).
Or, the CTO is demoted to an engineering manager and has to take a $100K pay cut (also a reasonable second trigger).
Outcome: The CTO's unvested stock options now vest fully due to the double trigger provision, providing financial protection following his termination.
Here’s a more detailed look:
Conditional Vesting: The unvested equity awards only vest if both conditions are met. For example, if the company is acquired and the executive decides to quit six months in on their own accord, the second condition is not met. Similarly, if the exec gets fired for doing something unethical, that doesn’t count either, and is actually an excuse to fire the exec for cause and not accelerate any equity.
Executive Retention: Executives are incentivized to stay and ensure a smooth transition because they will only receive the accelerated vesting if they are terminated without cause or resign for good reason. Double trigger is very much an insurance policy, and the buyer views it like the original deal consideration paying for the employee’s retention, rather than having to reload them with new equity off their own cap table (which would be more costly).
Balanced Protection: This approach balances the interests of both executives and the acquiring company. It protects executives from losing unvested equity if they are unfairly terminated post-acquisition, while also discouraging them from leaving immediately after the change in control, and sending the place into chaos.
How common are double triggers?
The majority of tech companies have double-trigger acceleration clauses in their equity agreements for some key employees. These provisions have become the industry standard, with >75% of companies employing them for change-in-control scenarios.
Now, this does not mean the vast majority of employees or even executives have them. It means the majority of companies have SOMONE who has one.
It’s rare for anyone below the VP level to have a double trigger clause, while it’s common (or “market”) for named officers (CFO, CMO, CTO, CPO) to have it.
At the individual exec level, from talking to multiple HR executives, my unscientific take is:
No acceleration: 65%
Double trigger acceleration: 30%
Single trigger acceleration: <5%
Sample Language
Here's some sample language I've seen used for double trigger provisions:
Change of Control and Double Trigger Acceleration
1. Definitions
1.1 Change of Control: For the purposes of this Agreement, a "Change of Control" shall mean the occurrence of any of the following events:
(a) The acquisition by any person or entity, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total voting power of the Company’s then-outstanding voting securities; (b) The consummation of a merger or consolidation of the Company with or into another entity, or any other corporate reorganization, if more than fifty percent (50%) of the combined voting power of the continuing or surviving entity’s securities outstanding immediately after such merger, consolidation, or other reorganization is owned by persons who were not stockholders of the Company immediately prior to such merger, consolidation, or other reorganization; (c) The sale, transfer, or other disposition of all or substantially all of the Company’s assets.
1.2 Good Reason: For the purposes of this Agreement, "Good Reason" shall mean any of the following conditions arising without the Executive’s consent:
(a) A material reduction in the Executive’s base salary; (b) A material reduction in the Executive’s duties, authority, or responsibilities; (c) A relocation of the Executive’s primary work location by more than fifty (50) miles from its current location.
2. Double Trigger Acceleration
2.1 Vesting Acceleration: In the event of a Change of Control and if the Executive’s employment is terminated by the Company without Cause or the Executive resigns for Good Reason within twelve (12) months following such Change of Control (the “Double Trigger Event”), the following provisions shall apply:
(a) All unvested equity awards granted to the Executive under any Company equity incentive plan shall immediately vest and become exercisable as of the date of the Double Trigger Event. (b) The Executive shall have twelve (12) months from the date of the Double Trigger Event to exercise any vested stock options.
NOTE: In addition to equity acceleration, many times these employment provisions will also include severance payments equivalent to some amount of base pay…
2.2 Severance Payment: Upon the occurrence of a Double Trigger Event, the Executive shall be entitled to receive:
(a) A lump sum cash payment equal to twelve (12) months of the Executive’s base salary at the rate in effect immediately prior to the Change of Control or the Executive’s termination, whichever is higher. (b) A lump sum cash payment equal to the Executive’s target annual bonus for the fiscal year in which the Double Trigger Event occurs.
3. General Provisions
3.1 No Mitigation: The Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise.
3.2 Release of Claims: The Executive’s receipt of any severance payments or benefits upon a Double Trigger Event will be subject to the Executive signing and not revoking a general release of claims in favor of the Company.
Does Any of It Really Matter?
A well respected CFO once told me:
“None of it matters because it all gets renegotiated during M&A anyways.”
While this is somewhat true, it’s better to have a provision as a starting position, rather than nothing. If you don’t have any acceleration terms the acquirer will say, “cool that’s our starting point then”. If you do have something it makes your position stronger.
A diplomatic way to go about it is to ask during the interview process if anyone else at your level has a trigger. If so, you’d like to be on par with them when it comes to safeguards and protections. It can’t hurt to ask.
Next week we’ll return to talk about earnouts, an M&A provision designed bridge gaps in valuation, retain key employees, and keep people’s heads in the game.
